NNN REIT, Inc. (NNN) Earnings Call Transcript & Summary

All right. Now I think we're live. Hi. This is -- good afternoon. This is Jay Whitehurst with National Retail Properties. I'm joined here this afternoon by Kevin Habicht, our CFO; and Steve Horn, our Chief Acquisition Officer. Welcome to this investor presentation. Many of you already know our story. So I'm going to quickly review our business model, and then we'll have some time for questions. Let's -- Chris, let's go ahead, go ahead to the next one. This is -- the slide lays out our business model that we've been executing for the past 30 years. We focus solely on single-tenant retail properties. Our portfolio is broadly diversified with high occupancy rate, and we are retail real estate experts that focus our acquisitions and underwriting on well-located parcels along high-traffic roads, leased to large regional and national operators in e-commerce-resistant businesses at market rents. And we maintain a conservative, flexible cap -- balance sheet and capital structure. And the result of all that is that we produce consistent multiyear per share growth and a dividend that we've increased for 30 consecutive years. This second slide is the highlight of our first quarter activities. Arguably, people have said it's the most irrelevant quarter of all time. So I won't really go into that other than to say it was a very consistent quarter that positioned us well for the coronavirus pandemic that struck at the end of the first quarter. An important driver of our long-term value creation at National Retail Properties is our history of raising the dividend every year for the past 30 years. And this feat has been accomplished by only 2 other REITs in less than 30 -- less than 90 other public companies. And as we mentioned on our call -- Chris, let's go back one second. Just as we mentioned in our call recently, we will continue to review our dividend policy in light of the effect of COVID-19. But our dividend is very important valuable asset of the company, our history of increasing the dividend. And so we do not, at all, take lightly the prospect of any changes to our dividend policy over time. All right. Thanks, Chris. Another hallmark of the company is our long-term focus on low leverage and maintaining a fortress-like balance sheet. We ended the first quarter with $217 million of cash in the bank and about 900 -- and $900 million of available capacity on our line of credit. And I think another notable factor here is that we have no debt maturities until 2023, so a very long weighted average debt duration. We're -- mostly, we've talked about the effect of COVID-19 on our portfolio and our business. And so this slide lays out some facts there that we've already disclosed that we've -- in April, we collected approximately 52% of our base rents, and we're working with tenants for deferrals on about 37% of our base rent. While we deal with all these deferral requests on an individual case-by-case basis, generally, these deferral discussions involved deferring 1 to 3 months of second quarter base rent with the deferred rent to be repaid commencing later this year and continuing through late next year. And the tenants remain responsible for paying the triple-net charges in these deferral arrangements. And these have been our customers for a long time, and we've been very collaborative with our long-term relationship customers as we all deal with this unexpected disruption. We do want to make it clear, though, that we have not been making agreements for any rent forgiveness nor have we advanced any funds to any tenants to be repaid as rent. We've been pleased with this approach. It's met with -- we've received a lot of positive comments from our tenants about our approach to dealing with them as their long-term partners, and we are seeing our tenants' businesses slowly beginning to rebound. I'm sure we'll talk about that more in the Q&A. Drilling a little bit deeper into the portfolio, this chart shows our long-term occupancy rate. You can see that in the depth of the recession in 2008, 2009, we dipped to 96.4% occupied, and we recovered relatively quickly from that. This management team has been together for a long time. We've been through a lot of ups and downs and a lot of headwinds. Anytime you're in one of these situations like we have today, it always feels like it's the worst. But we feel like this chart helps to establish that the properties that we have are historically in high demand, and we expect that they'll continue to be in high demand when all this is behind us. Let's go ahead, and we can go ahead. Looking at the lines of trade that make up our portfolio, you see that we're focused on customer services and e-commerce-resistant consumer necessities. Our top line of trade, convenience stores, has performed very well through this crisis and can provide essential goods and services to its customers. I'm sure we'll talk about some of the other lines of trade during our Q&A as well. And if you -- it's not -- I think it's not the next slide. This slide is on our overall deck, but not on these particular ones. If you do look at our top tenants, you see that our top tenants are large regional and national operators, that our top 25 tenants operate over 1,000 units each on average. And so these large operators are -- we feel well -- better positioned than many other tenants to withstand the disruption in their business that they're facing right now. So another real moat around our business is our acquisition strategy of focusing on doing direct off-market business with retailers. When we do that, structure these direct sale-leaseback transactions, we get slightly better real estate because the retailer does not want to sell and leaseback a property that the retailer is concerned about. We also get a better lease document that we can negotiate directly to focus on the points that we want, and we get slightly better lease economics because, again, we're dealing directly with the retailer and not having to deal with any developer markup. It's a lot of work, but it pays dividends. And about 2/3 of our volume of acquisitions the last number of years has been directly from these relationship retailers. We did take a pause in acquisitions at the end of March as we saw the pandemic growing. And much like we did in 2008 and 2009, we're just watching the markets right now to get a feel for what their -- what new pricing might be and just for things to settle down. You'll see we did the same kind of thing in 2008, 2009. For the moment, we're just being cautious with our capital. Chris, go ahead. Last slide here is just focusing on the people. The -- we maintain a very flat organization with only about 70 employees that handle all of our properties and all of our real estate. But the main point I want to make here is the long tenure of the staff. 2/3 of the team has been with us for more than 5 years, and half for at least 10 years. That is a stark contrast to lots of other real estate companies. And it comes in very valuable during times of disruption in the market and in particular, it comes in -- it has proven to be very valuable with folks working remotely right now. It is great to know your colleagues have, on average, 10 years of experience that -- when everybody is at home. With that, Chris, I think let's just turn it over to some questions.

[Operator Instructions]

Okay. First question is -- talks about -- asks us to talk about outlook for gyms. So Steve Horn, I'm going to ask you to give a -- talk a little bit about maybe gyms. And let's go ahead and talk about some -- a few of the other lines of trade that are more affected by the pandemic.

Yes. As far as gyms, our current tenants in the gyms, they're slowly opening up. They have capacity limitations. However, the good news is they're able to turn their ACH on to -- on customers that a gym has opened up in their local market. So gyms, it will be a slow recovery, but they'll recover, we feel. Industries, movie theaters. Movie theaters is going to be our biggest challenge of industries that we're in. There's no timetable for movies to -- or movie theaters to open, and the movie theater production company has been holding off the release of some movies. Full-service restaurants. For the most part, all ours stayed open in some form of capacity. Primarily, it was carryout at the beginning. If the heartbeat of the restaurant doesn't show up, being the customers, they were struggling pretty big. Now as far as opening up, 25%, 50% in some states, but there's still social distancing limitations. The good news is all our tenants are trying to work in the situation and thinking of ways to get revenue in the door.

Yes. There's one other question about what percent of tenants are open today. I'll say that we don't track that precisely because it is fluid. But other than what Steve talked about with movie theaters and health clubs being closed or only open in a few states, the vast majority of our other properties, we think, are open at this point and at least partially. Now we had another question coming to talk about May rent collections. We take a very long-term view toward the operation of our business. And as we said, when we -- on the earnings call when we announced April rent collections, we said that we were not going to get into the -- kind of fall into the short-termism trap of doing monthly reporting on rents. And so we are not reporting May rent, and we'll report -- the next report we give on rent collections will be for the second quarter when we report those results in early August. But I will say, again, we've been very pleased with the approach that we took with our tenants to craft simple short-term rent deferrals that would be repaid starting relatively soon and be repaid relatively quickly. We've heard from a number of our tenants that, that was helpful. Anecdotally, we've had a few tenants with whom we entered into deferral arrangements who came back to us and said that their businesses reopened faster than they expected and that the tenants did not want to "run a tab" with NNN. They did not want to have the liability of deferred rent and so asked to do away with the deferral agreement and just go back to making regular monthly payments. And so we certainly appreciated that, and it was the best of all worlds. We were able to be a very good partner to our tenant and also have the rent collected on a more current basis. The -- that -- so we feel good about the way we've approached all of this, and we feel good that the outcome is going to be -- look, it's going to be a positive outcome for us over the long-term with these tenants. So Kevin, you were probably looking at the questions while we were going through this. Are there any -- what's the theme among the questions here?

None really. I'll hit a couple, I guess, along the way here as they came in. A question regarding whether the protests have impacted our properties. Not really. We have reports of one store in the Minneapolis area that was impacted by the looting and rioting. Keep in mind that our stores generally are in suburbia south. And so that's -- versus where a lot of the looting and rioting issues are more urban and dense areas. And so we don't anticipate much issue there. And also, keep in mind that our properties are triple-net lease, and so it's a tenant responsibility to put them back in good order again. So we don't anticipate any issues from the protests.

One question. What percentage of your properties have drive-in capability? Steve, I would say that our fast food, it's 100%.

100%, the QSR. And then there's a portion of the casual dining that has drive-thru capability.

Yes. Either drive-thru or pick up, we've been -- probably 100 percentage of them.

In today's environment, 100% of the casual dining have carryout.

Yes. Yes. There's a -- I mean, a broader question is do you expect net lease consolidation among net lease tenants? And talk about the opportunities there. And yes, we do expect that. That has been a good source of business for us through the years, is building relationships with growing regional and national operators who, in part, continue their expansion by doing M&A transactions and using the real estate as a source of capital -- doing sale-leaseback as a source of capital for M&A transactions. So we have built relationships with some of the industry leaders in each of the lines of trade that make up our portfolio. And so to the extent they're able to pick up bolt-on additional businesses through this as a result of this slowdown, we would expect that, that may generate some business for us. As we said right now, we are staying in touch with our relationship tenants, but we're taking a pause in the acquisition of new properties. But that is something we're looking forward to getting passed and getting back to playing offense once we're comfortable that things are beginning to stabilize. All right. Somebody else help me out here. What was another question you see?

A question regarding the process of further rent deferrals, which in our minds, we call phase 2. So in the beginning of April, May, June, we took a fairly straightforward, simple approach to -- for a certain group of tenants that we would make deferral arrangements with, in which they could defer 2 to 3 months of rent out until late 2020 -- beginning in 2020 out to late 2021. And to the extent after that first deferral period, which generally runs through the end of the second quarter, if a tenant is circling back to us and asking for additional relief, at that point in time, I think our dialogue will get a little more robust and a little more focused on finding ways and how it can help NNN to the extent we're going to continue a dialogue about deferrals further. So it will be a harder conversation, if you will, for the tenant in that environment. The first round -- the first go-around, what we think of as phase 1, we were trying to be relatively accommodating, firm but fair, but trying to work with our relationship tenants, get them to the other side of the downturn. And hopefully, the green shoots of store reopenings and consumer traffic begins to give them the greater ability to pay rent. But if we get to a phase 2 with some of our existing deferred tenants, like I said, that conversation will get a little bit more challenging for them, I believe.

There's a related question. So are you deferring rent for some tenants, but those tenants making payments to your peers? The answer to that is that it may be the case. We took -- I'm not certain. And I doubt that it's very -- I doubt that it's material. But there may have been some instances where we had a long-term relationship with the tenant and chose not to punch them in the nose but to make -- but to go ahead and make a deferral agreement that -- on the terms that we've talked about previously. Whereas some other landlord may have chosen to be more aggressive with that tenant. But generally, I think that, that hasn't happened very much at all. I think that it's -- I suspect it's consistent across all the landlords. There was one simple question while I'll let you guys look at some of the other ones. Do you only operate in the United States? Or do you also work overseas? We are focused only on U.S. properties. The marketplace for single-tenant retail properties in the United States is vast, multibillions of dollars. And so it's a large marketplace that we understand very well and can underwrite very well. And so the ability to generate $600 million, $700 million a year of acquisitions is what we typically need to do to generate the kind of per share growth rate that we're looking for, kind of a mid-single digits per share growth rate on a multiyear basis. That's certainly been disrupted right now but that's still the long-term plan. And so we're able to find more than enough properties in the United States to meet our acquisition goals, to meet our growth goals and not have to look in markets that we don't understand nearly as well. Any other question, Kevin?

One question asking about what kind of change in cap rates did we see in 2008 and ‘09. And do we expect them kind of this go-around? Which -- '08, '09 is a similar, I mean, rough patch of economic. And so there's some corollary there. But yes, I'd say, back in '08, '09, we probably saw a total of, from peak to trough, if you will, 100 basis points of cap rate increase in that period. But I'm here to tell you, it didn't last long and dissipated pretty quickly with the continued movement down in interest rates. But there was a year or 2 period in there where cap rates did move not much from, call it, the mid-8s to the mid-9s cap rates. But that quickly changed by 2011 and started at steady march lower, along with long-term interest rates and return on every other asset class. It's -- boy, you think cap rates can't go much lower, and we don't think interest rates could go much lower, but look where we are. But we'll see. It doesn't feel like they're going to go a lot lower, but there could be some dislocation for a period of quarters, and you could get some -- a tick up in rates. We think it's warranted. But so far, there's -- the Fed and the federal government seems to be hell-bent on creating a lot of liquidity and money sloshing around the system. So I think that's going to keep a lid on cap rates, is my guess.

There was a question about incremental improvements in the casual dining segment. So Steve, I'm going to ask you to talk about that.

Yes. Yes. Since our conference call, a significant amount of states have opened up to the restaurant. So the customers are starting to go, but more important, I think the restaurants are learning how to do the carryout a little bit better and customers are starting to come. So yes, there's definitely been an improvement in the revenue, where off the get-go, the restaurants could have been down 70% in some cases. Then when they improved on the carryout, they were down 50%. And then when the customer started coming, the early signs were their carryouts dropped, but that was just the customers that started coming in the restaurants. But now you're kind of seeing them at the 60%, 65% level from the beginning.

A question, how do you balance being a partner with tenants versus collecting rent owed, especially if they are able to pay? That certainly is the art of being a good long-term partner with your tenants. When this pandemic began to affect all of the businesses of our tenants, we -- when we -- the conversations that we would have with tenants would focus on, is their business open? Are they continuing to operate? Are they open partially? How much effect has there been on them? There were definitely some instances where tenants requested some kind of rent relief, but their businesses were open and operating, and we felt like it was fair that the tenant continue to pay rent, and then -- and did not enter into any deferral arrangement. Again, what we were crafting were simple, short-term deferrals for tenants where we felt like the business justified that. And to the extent that some other landlord took a different position and had some different outcome, so be it. We are happy with this approach that we took, and it's been -- and I said, it's been well received by the tenants. And in the end, if we defer a couple of months of rent and then the tenants -- they get their business back operating, and the tenant is able to catch up, and we get that deferred rent repaid a little bit down the road, that -- the lost timing there, the difference in timing on rent to us really doesn't make much of an impact at all. And we think that it'll stand us in very good stead with our customers going forward. Another question, do you expect rents to be -- or vacancy to be more or less impacted versus the great financial crisis? Right now, I'd say we probably think it's not going to be less, the same or more. But every time you're in the middle of one of these things, you think it's the worst one ever. And we've been through a number of them before. Right now, our occupancy is still holding up in there. But longer term, we'll just have to wait and see how it plays out. But we won't be surprised if it's a little bit worse than it was in 2008, 2009. Kevin, here's a question about the revolver.

Yes. The question one about our revolver; then two, related to that, cost of capital over the coming months. Yes, our revolver is a $900 million credit facility. No amounts outstanding on it. It does not come due until January of 2022. And we actually have 1-year extension at our sole option beyond that. So January 2023 would be the ultimate maturity of that. So we've got a good bit of time yet left on that. And like I said, we haven't been utilizing it of late. And frankly, for the last 5 or 6 years, we haven't used it much at all. So we've got a lot of liquidity in that respect. So that's good. In terms of changes to our cost of capital over the next 6 to 12 months, that's a little hard. In one sense, yes, it's hard to figure out where your cost of equity is. We always take a longer-term view and think of it as being around 8%, which is what we think of reasonable return expectation for owning NNN shares is for the equity piece. The debt piece is still -- for 10-year unsecured debt for us would be in the low 4s today, probably. So you can kind of figure out where we -- how we think about our weighted average cost of capital from that. The reality is -- and this kind of leads to the question about when are we going to start the economic moving back to acquisitions and playing offense more because that's really -- our primary need for capital is related to acquisitions. And so we really don't see the need for using any capital in the coming months. And when we do start the acquisition engine, we will probably lean a little bit more on the debt side and wait for the equity markets to heal up before we tap into those in a material way.

All right. It looks like our time is up, and we're out of questions. So we thank you all very much for attending today. If you have anything else, feel free to call anytime.